A client is selling land which they have opted to tax. The buyer, a housing association, intends to issue a certificate to disapply the option. Will this have consequences for your client and is there an alternative you can suggest?

Land with planning permission

You act for a client that purchased some land five years ago for £500,000, for letting to a local farmer. The seller had opted to tax the land so in order to recover the £100,000 of VAT being charged, you advised your client to opt to tax the land also.

After a successful planning permission application to the local authority, your client has just accepted an offer to sell the land to a local housing association for £2 million, which will then construct residential dwellings for letting. As the association will be making exempt supplies of letting, they will not be able to recover the £400,000 of VAT being charged by your client. They have therefore expressed their intention to issue your client with a certificate to disapply the option to tax. What consequences will this have, and does your client have to accept the certificate?


Para. 3 of VAT Notice 742A details various supplies that are not affected by an option to tax. Para. 3.6 deals with land sold to a housing association.

Where the housing association certifies that they intend to use the land to construct residential dwellings, your client’s option to tax will not apply and the sale will be exempt from VAT. Unfortunately, your client cannot refuse the election if it is validly made.

Pro advice 1. The certification must be made on HMRC certificate VAT1614G (see Follow up ), although the election does not need to be filed with HMRC.

Pro advice 2. The certificate must be given to your client before they make the supply and legally fix the price, for example on exchange of contracts.

The effect of the certificate is that your client will not charge any VAT on the sale. This will be good news for the housing association as they will save £400,000 of VAT, however will it be a good deal for your client?

Capital goods scheme

When a business incurs VAT on purchases of certain high value capital assets (including land), part 15 of Statutory Instrument 1995/2518 requires that the VAT recovery is monitored over a number of years and adjusted to reflect any changes in taxable use.

In the case of land, the capital goods scheme applies to purchases costing £250,000 or more, and the VAT recovery is monitored over a period of ten years.

Pro advice. Where there is a sale of land within the ten-year monitoring period, the VAT liability on the sale will be used to determine the VATable use of the land for the rest of the remaining monitoring period.

As your client opted to tax the land on purchase, they used it for a taxable purpose and so could recover all of the VAT. However, if the housing association issues your client with a certificate so that the sale is exempt from VAT, there will be a change in taxable use which will trigger a VAT adjustment.

Example. Your client acquired the land five years ago for £500,000 plus VAT of £100,000 which it recovered in full. An exempt sale to the housing association will mean your client has changed the use of the land half way through the ten-year adjustment period, from being fully taxable to wholly exempt.

An adjustment of 5/10ths of the initial VAT recovered will need to be made, and your client will have to pay £50,000 to HMRC.

Is there an alternative you could suggest that would allow your client to keep all of the VAT previously recovered, whilst not charging any VAT to the housing association?

“Golden brick” planning

In order to avoid a clawback under the capital goods scheme, any sale of the land would need to be a taxable one. Since a standard-rated sale gives the housing association a problem, the sale will need to be zero-rated.

If your client is willing to commence the construction of the dwellings on behalf of the housing association, before transferring the land to it, the sale can be zero-rated as a partly constructed dwelling under item 1, group 5, sch. 8VAT Act 1994“the first grant by a person constructing a building designed as a dwelling” .

The legislation does not define what a partly constructed dwelling is, however HMRC in its VAT manual VCONST03550 (see Follow up ) confirms that a building is being constructed when work has progressed above foundation level. This is usually when the walls begin to be constructed upon the foundations, although the walls do not need to be above ground level. The so-called golden brick is the level of construction that achieves this.

Therefore, providing a building is clearly under construction and the level of construction is above foundation level, golden brick will have been reached and zero rating will be available.

Pro advice. The zero rating of the land sale means there has been no change in taxable use and your client can therefore retain all of the VAT. They can also recover any VAT incurred in connection with the construction.


It is common practice in land sales for the purchaser to pay a deposit, often up to 10% of the purchase price. If the deposit is paid direct to the seller this will trigger a VAT tax point, therefore it is usual for the conveyancing solicitor (as stakeholder) to keep hold of the deposit until completion and release it to the seller together with the sale proceeds.

However, in a golden brick arrangement the deposit will be needed by your client in order to fund the construction works. Releasing the deposit to your client on exchange of contracts, before the golden brick stage has been met, will ordinarily mean the deposit charged to the housing association will be standard-rated.

Pro advice. As long as the contract with the housing association makes it clear that what will be supplied to them at completion will be partly completed dwellings, i.e. beyond the golden brick stage, HMRC has stated at VCONST03540 (see Follow up ) that the deposit can be considered as part payment for the site and it too can be zero-rated.

Your client can therefore fund the initial stage of construction using the deposit and be able to recover any VAT incurred in connection with the development.

Golden Oak

In a golden brick arrangement, the VAT risk sits with the housing association. Should the development not be considered sufficient to constitute partly completed dwellings, zero rating cannot apply.

However, as a backup plan, it may still be possible to structure the development as a VAT- free sale under the transfer of a going concern (TOGC) provisions. This is providing the activities undertaken by your client are considered sufficient to constitute a property development business, which the housing association continues with following completion.

In a 1992 First-tier Tribunal (FTT) case involving the Golden Oak partnership, the partnership purchased a partly completed development and intended to continue with the development started by the seller. They continued the construction work without any break and the FTT held this was a TOGC.

The disapplication could trigger a charge under the capital goods scheme. Instead, advise the client that the sale could be zero-rated if they commence construction to a sufficient degree for the sale to constitute partly completed dwellings. Ensure one layer of bricks are laid above foundation level in order to reach the golden brick stage.

Follow Up




VAT Notice 742a